Every Financial Plan is Wrong

I have to admit, as
someone who creates financial plans, when I first heard one of our industry’s
thought leaders make that statement in an interview I cringed a little. But,
when I considered what he was saying, and the real implications of his statement,
I knew he was right and that accepting this truth would make me a better
financial planner.

Every financial plan
ever produced is wrong because a plan is nothing more than projected outcomes
based on many, many assumptions, and at least some of those assumptions will be
wrong. We can account for some variability. We use sophisticated modeling techniques
to analyze portfolios and project a range of outcomes rather than assuming a
nice, smooth investment return. We run scenarios with different inflation
averages and health care costs to see how plans may need to change.

But no matter how
hard we try, we can’t account for every possible variable. Some of those will
be market – driven and tied to the economy, but many of the more important
variables will be tied to our client’s lives: accidents, deaths, divorces,
illness, all happen. But good things like births and marriages, business growth
and unexpected windfalls also happen.
Life changes, often unpredictably and quickly, and when it does there
are real impacts to your financial plan.

So if every
financial plan is wrong, why create one at all? A well – constructed financial
plan allows you to make the best decisions possible for your situation based on
everything we know at the moment. When life changes, you can think through the
changes and adapt from a position of understanding.

More importantly,
accepting that every financial plan is wrong allows us to shift the focus from
the OUTPUT of the plan, which is sometimes stale before the ink dries, to the
PROCESS of financial planning. Envisioning your future and crafting a plan is financial
planning’s starting point, not it’s end. Once an initial plan is put down on
paper, and you’ve taken steps to put the plan in action, the plan can’t be
stuck on a shelf to collect dust. Revising and updating the plan needs to be an
ongoing, evolving process. Your life will change and your plan needs to change
with it.